Transcript of © 2009 Clarence Byrd Inc. 1 Chapter 2 Investments In Equity Securities.
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- 2009 Clarence Byrd Inc. 1 Chapter 2 Investments In Equity
Securities
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- 2009 Clarence Byrd Inc.2 Chapter Objectives Classification of
equity investments Accounting for equity investments Matching
classifications with methods
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- 2009 Clarence Byrd Inc.3 Conceptual Basis For Classification
Held for trading Available for sale 50% 100% 0% Joint ventures
Significantly Influenced companies Subsidiaries
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- 2009 Clarence Byrd Inc.4 Classification Non-strategic
investments held-for-trading available-for-sale Strategic
investments Subsidiaries Significantly influenced companies
(Associates) Joint ventures
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- 2009Clarence Byrd Inc.5 Accounting Methods Cost method Equity
method Fair value method (changes in Net Income) Fair value method
(changes in Comprehensive Income) Full consolidation Proportionate
consolidation
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- 2009 Clarence Byrd Inc.6 Held-For-Trading Defined (Section
3855) Acquired principally for the purpose of selling or
repurchasing in the short term; A derivative; or Any financial
asset or liability that is so designated
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- 2009 Clarence Byrd Inc.7 Held-For-Trading Application To
Investments Equity securities held for short term trading Other
non-strategic holdings that are designated as held for trading
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- 2009 Clarence Byrd Inc.8 Held-For-Trading Accounting Procedures
Initial and subsequent measurement at fair value Changes in fair
value are allocated to Net Income in the period they occur
Transaction costs charged to Net Income at acquisition
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- 2009 Clarence Byrd Inc.9 Held-For-Trading Example EXAMPLE: On
January 1, 2008, Holly Inc. acquires 1,000 shares of Helm Ltd. for
$10 per share. The shares are classified as held for trading. On
December 31, 2008, the Helm Ltd. shares are trading at $12 per
share. During 2008, Helm Ltd. declares and pays dividends of $0.75
per share. On January 1, 2009, the securities are sold for $13 per
share.
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- 2009 Clarence Byrd Inc.10 Held-For-Trading Example Acquisition
Of Investment January 1, 2008DebitCredit Investments
[(1,000)($10.00)]$10,000 Cash$10,000
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- 2009 Clarence Byrd Inc.11 Held-For-Trading Example Receipt Of
Dividends During 2008DebitCredit Cash [(1,000)($0.75)]$750
Investment Income (Net Income)$750
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- 2008 Clarence Byrd Inc.12 Held-For-Trading Example Year End
Adjustment December 31, 2008DebitCredit Investments [(1,000)($12.00
- $10.00)]$2,000 Investment Income (Net Income)$2,000
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- 2009 Clarence Byrd Inc.13 Held-For-Trading Example Sale Of
Investment January 1, 2009DebitCredit Cash [(1,000)($13.00)]
$13,000 Investments ($10,000 + $2,000)$12,000 Investment Income
(Net Income)$1,000
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- 2009 Clarence Byrd Inc.14 Available-For-Sale Defined (Section
3855) Non-derivative financial assets that are designated as
available for sale, or that are not classified as loans and
receivables, held-to-maturity, or held-for trading
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- 2009 Clarence Byrd Inc.15 ________ __ ___ ________ __ ___
________ __ ___ ________ __ ___Available-For-Sale Would include all
equity investments other than: Investments in subsidiaries
Investments in significantly influenced companies Investments in
joint ventures Investments that are classified or designated as
held for trading.
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- 2009 Clarence Byrd Inc.16 Available-For-Sale Accounting
Procedures Initial and subsequent measurement at fair value Changes
in fair value are allocated to Comprehensive Income Transaction
costs: charged to Net Income at acquisition, or added to the
initial cost
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- 2009 Clarence Byrd Inc.17 Available-For-Sale Example EXAMPLE:
On January 1, 2008, Holly Inc. acquires 1,000 shares of Helm Ltd.
for $10 per share. The shares are classified as available for sale.
On December 31, 2008, the Helm Ltd. shares are trading at $12 per
share. During 2008, Helm Ltd. declares and pays dividends of $0.75
per share. On January 1, 2009, the securities are sold for $13 per
share.
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- 2009 Clarence Byrd Inc.18 Available For Sale Example
Acquisition Of Investment January 1, 2008DebitCredit Investments
[(1,000)($10.00)]$10,000 Cash$10,000
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- 2009 Clarence Byrd Inc.19 Available For Sale Example Receipt Of
Dividends During 2008DebitCredit Cash [(1,000)($0.75)]$750
Investment Income (Net Income)$750
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- 2009 Clarence Byrd Inc.20 Available For Sale Example Year End
Adjustment December 31, 2008DebitCredit Investments [(1,000)($12.00
- $10.00)]$2,000 Other Comprehensive Income Gain*$2,000 *After
being included on the statement of comprehensive income this will
be disclosed to the balance sheet account Accumulated Other
Comprehensive Income.
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- 2009 Clarence Byrd Inc.21 Available For Sale Example Sale Of
Investment January 1, 2009DebitCredit Cash [(1,000)($13.00)]
$13,000 Other Comprehensive Income Reclassification2,000
Investments ($10,000 + $2,000)$12,000 Investment Income (Net
Income)3,000
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- 2009 Clarence Byrd Inc.22 Cost Method Applicability Can be used
when available-for-sale securities do not have quoted market prices
Procedures Investment at cost Earnings only when received or
receivable
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- 2009 Clarence Byrd Inc. 23 Cost Method Return of capital:
Occurs when dividends received exceed the investors share of
earnings since acquisition. These are regarded as a recovery of
investment (return of capital)
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- 2009 Clarence Byrd Inc.24 Return Of Capital Example EXAMPLE: On
January 1, 2008, Norton Inc. acquires 10 percent of the voting
shares of Montage Ltd. for $500,000. During 2008, Montage has Net
Income of $350,000 and pays dividends of $250,000. During 2009,
Montage has Net Income of $100,000 and pays dividends of
$250,000.
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- 2009 Clarence Byrd Inc.25 Return Of Capital Example Acquisition
Of Investment January 1, 2008DebitCredit Investment In
Montage$500,000 Cash$500,000
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- 2009 Clarence Byrd Inc.26 Return Of Capital Example Receipt of
2008 dividends During 2008DebitCredit Cash [(10%)($250,000)]$25,000
Investment Income$25,000
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- 2009 Clarence Byrd Inc.27 Return Of Capital Example Receipt of
2009 dividends During 2009DebitCredit Cash [(10%)($250,000)]$25,000
Investment Income [(10%)($350,000 - $250,000 + $100,000)] $20,000
Investment In Montage [(10%)($250,000 - $100,000 - $100,000)]
5,000
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- 2009 Clarence Byrd Inc.28 Subsidiaries Paragraph 1590.03(a) A
subsidiary is an enterprise controlled by another enterprise (the
parent) that has the right and ability to obtain future economic
benefits from the resources of the enterprise and is exposed to the
related risks.
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- 2009 Clarence Byrd Inc.29 The Concept Of Control 1590.03(b)
Control of an enterprise is the continuing power to determine its
strategic operating, investing, and financing policies without the
co-operation of others.
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- 2009 Clarence Byrd Inc.30 The Concept Of Control In general,
based on ownership of more than 50 percent of the outstanding
voting shares Exceptions Control may exist without majority
ownership Control may not exist even with majority ownership
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- 2009 Clarence Byrd Inc.31 The Concept Of Control PAB 60%55
%
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- 2009 Clarence Byrd Inc.32 The Concept Of Control P YZ X 70% 40%
30%60%
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- 2009 Clarence Byrd Inc.33 Subsidiaries Accounting Procedures
Paragraph 1590.16 An enterprise should consolidate all of its
subsidiaries. (January, 1992) Consolidation procedures will be
covered in Chapters 4, 5, and 6
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- 2009 Clarence Byrd Inc.34 Significantly Influenced Companies
Defined IAS 28 Significant influence is the power to participate in
the financial and operating policy decisions of the investee, but
is not control over those policies CICA (section 3051) has a 20
percent guideline Judgment would have been better Key is the
ability to elect directors
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- 2009 Clarence Byrd Inc.35 Significantly Influenced Companies
Required Accounting Procedures: Section 3051 requires the use of
the equity method
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- 2009 Clarence Byrd Inc.36 Equity Method Procedures Accounting
for the investment asset Initial investment is recorded at cost
Adjusted each year for the investors shares of the investees change
in Retained Earnings
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- 2009 Clarence Byrd Inc.37 Equity Method Procedures Accounting
for investment income Investment income is equal to the Investors
share of the reported Net Income of the Investee.
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- 2009 Clarence Byrd Inc.38 Equity Method Example EXAMPLE: On
January 1, 2008, Fortin Inc. pays $800,000 for a 25 percent
interest in the voting shares of Beauchamp Ltd. This investment
gives Fortin Inc. significant influence over Beauchamp Ltd. During
the year ending December 31, 2008, Beauchamp Ltd. has net income of
$300,000 and pays dividends of $180,000. During the year ending
December 31, 2009, Beauchamp Ltd. has a net loss of $100,000 and
pays dividends of $150,000. On January 1, 2010, Fortins holding of
Beauchamp securities is sold for $1,200,000.
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- 2009 Clarence Byrd Inc.39 Equity Method Example Acquisition Of
Investment January 1, 2008 DebitCredit Investment In Beauchamp
$800,000 Cash$800,000
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- 2009 Clarence Byrd Inc.40 Equity Method Example 2008 Income And
Dividends Year Ending December 31, 2008 DebitCredit Cash
[(25%)($180,000) $45,000 Investment In Beauchamp [(25%)($300,000 -
$180,000)] 30,000 Investment Income [(25%)($300,000)] $75,000
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- 2009 Clarence Byrd Inc.41 Equity Method Example Year Ending
December 31, 2009 DebitCredit Cash [(25%)($150,000)] $37,500
Investment Loss [(25%)($100,000)] 25,000 Investment In Beauchamp
[(25%)(- $100,000 $150,000)] $62,500 2009 Income And Dividends
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- 2009 Clarence Byrd Inc. 42 Equity Method Example Sale Of
Investment January 1, 2010 DebitCredit Cash$1,200,000 Investment In
Beauchamp ($800,000 + $30,000 - $62,500) $767,500 Gain On
Investment Sale 432,500
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- 2009 Clarence Byrd Inc.43 Equity Method Results of discontinued
operations and extraordinary items of the investee must be shown in
the investors Statement Of Net Income as separate line items after
Income Or Loss Before Discontinued Operations And Extraordinary
Items.
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- 2009 Clarence Byrd Inc.44 Equity Method EIC No.8: negative
balance can be shown if: Investor has guaranteed obligations of the
investee The investor is committed to provide further financial
support The investee seems assured of returning to
profitability
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- 2009 Clarence Byrd Inc.45 Equity Method Significant Influence
To Control Consolidation is required
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- 2009 Clarence Byrd Inc.46 Equity Method Significant Influence
To No Influence Will become held-for-trading or available-for-sale
The new cost will be the equity value at the time of the
change
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- 2009 Clarence Byrd Inc.47 Equity Method Consolidation
Adjustments All of the adjustments that would be required in
preparing consolidated statements are required here. See Chapters 5
and 6 for illustrations of these procedures.
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- 2009 Clarence Byrd Inc. 48 Significantly Influenced Companies
Disclosure Basis of valuation Separate disclosure of the class in
both the Balance Sheet and the Income Statement Treatment of the
difference between the cost of the investment and the underlying
book value of the investees assets at the date of acquisition.
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- 2009 Clarence Byrd Inc.49 Impairment Of Significantly
Influenced Companies Paragraph 3051.18 When there has been a loss
in value of an investment that is other than a temporary decline,
the investment should be written down to recognize the loss. The
write-down should be included in the determination of net income
and may or may not be an extraordinary item.
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- 2009 Clarence Byrd Inc.50 Impairment Of Significantly
Influenced Companies Indicators Depressed market prices Severe or
continued losses Suspension of trading Liquidity or going concern
problem Current fair value less than carrying value
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- 2009 Clarence Byrd Inc.51 Impairment Of Significantly
Influenced Companies Subsequent recoveries Write-downs cannot be
reversed
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- 2009 Clarence Byrd Inc.52 Impairment Other Investments HHHHeld
for trading Already at fair value AAAAvailable for sale at fair
value If impaired, transfer from comprehensive to net income
AAAAvailable for sale at cost Same rules as significantly
influenced companies SSSSubsidiaries and Joint Ventures Subject to
provisions that relate to specific assets (e.g., 3063 deals with
impairment of long lived assets)
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- 2009 Clarence Byrd Inc.53 Joint Venture Arrangements Paragraph
3055.03(c) A joint venture is an economic activity resulting from a
contractual arrangement whereby two or more venturers jointly
control the economic activity
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- 2009 Clarence Byrd Inc.54 Joint Venture Arrangements Current
accounting rules require the use of proportionate consolidation
Proportionate consolidation will be covered in Chapter 8 IASB will
eliminate proportionate consolidation and require the equity
method
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- 2009 Clarence Byrd Inc.55 Differential Reporting Options
Subsidiaries Qualifying enterprises may elect to use either the
cost method or the equity method for these investees Additional
procedures and disclosures are required
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- 2009 Clarence Byrd Inc.56 Differential Reporting Options
Significantly Influenced Companies Qualifying enterprises may elect
to use the cost method for these investees, instead of equity
method Additional procedures and disclosures are required
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- 2009 Clarence Byrd Inc.57 Differential Reporting Options Joint
Ventures Qualifying enterprises may elect to use either the cost
method or the equity method for these investees Additional
procedures and disclosures are required
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- 2009 Clarence Byrd Inc.58 International Convergence
Held-for-trading and available-for-sale investments: covered in IAS
39
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- 2009 Clarence Byrd Inc.59 IAS 39 Differences Held-for-trading
replaced by financial asset at fair value through profit or loss
Generally doesnt allow arbitrary designation as held for trading
Allows cost when fair value not readily determinable as opposed to
no quoted market value Does not provide an optional treatment of
transaction costs Requires the reversal of impairment write downs
when there is a recovery
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- 2009 Clarence Byrd Inc.60 International Convergence
Significantly influenced companies: covered in IAS 28
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- 2009 Clarence Byrd Inc.61 IAS 28 Differences Uses the term
associated companies rather than significantly influenced companies
Impairment when recoverable amount is less than the carrying
amount. Recoverable amount based on present value of future cash
flows IAS 28 requires the reversal of an impairment loss when a
recovery has occurred
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- 2009 Clarence Byrd Inc.62 International Convergence
Subsidiaries and joint ventures Differences will be covered in
later chapters
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- 2008 Clarence Byrd Inc.63